In This Article:
While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We'll use ROE to examine Sedlmayr Grund und Immobilien AG (FRA:SPB), by way of a worked example.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Sedlmayr Grund und Immobilien
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sedlmayr Grund und Immobilien is:
6.3% = €16m ÷ €249m (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.06 in profit.
Does Sedlmayr Grund und Immobilien Have A Good ROE?
By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. The image below shows that Sedlmayr Grund und Immobilien has an ROE that is roughly in line with the Real Estate industry average (6.9%).
That isn't amazing, but it is respectable. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If so, this increases its exposure to financial risk. You can see the 4 risks we have identified for Sedlmayr Grund und Immobilien by visiting our risks dashboard for free on our platform here.
Why You Should Consider Debt When Looking At ROE
Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.
Combining Sedlmayr Grund und Immobilien's Debt And Its 6.3% Return On Equity
It seems that Sedlmayr Grund und Immobilien uses a huge volume of debt to fund the business, since it has an extremely high debt to equity ratio of 3.20. The combination of a rather low ROE and high debt to equity is a negative, in our book.